LONDON (Reuters) - There is more than a one-in-five chance that Britain remains in the European Union and there’s a greater likelihood of that outcome than a no-deal Brexit, said Peter Fitzgerald, head of multi-asset management at Aviva Investors.
Fitzgerald, who helps manage 346 billion pounds ($445 billion) as chief investment officer for multi-asset and macro, told the Reuters Global Investment Outlook Summit that the risk of a disorderly no-deal Brexit was fading so the Dec. 12 election may not significantly alter sterling’s trajectory.
The currency rallied after Prime Minister Boris Johnson secured a divorce deal with Brussels last month and hasn’t fallen much even after it failed to get through parliament and the election was called.
“The possibility of a no-deal exit from the EU, while not zero, is much lower than people assumed it was going to be when (Johnson) took over as prime minister,” said Fitzgerald, who has become more upbeat about sterling’s prospects.
“I’d say the probability of the UK remaining (in the EU) is more than the UK leaving without a deal.”
Asked if the chances of a so-called Remain scenario were more than 20%, he said Yes.
“We have over the last five years, on balance, been short sterling. We have now moved from short sterling to long sterling,” Fitzgerald said.
Currently around $1.29, sterling was above $1.50 before the 2016 Brexit referendum. Fitzgerald reckons a move “closer to” $1.40 is possible.
He predicted world stocks would add to this year’s gains so far of 18-20% as gloom lifts on trade and growth and he said he has modestly increased equity allocations.
But an equity “melt-up” is a risk, he said, referring to a rally driven not by fundamentals but by an influx of investors who fear missing out on returns.
While investors typically buy “put”, or sell, options to guard against market losses, Fitzgerald said “call”, or buy, options currently made more sense.
“You need to start looking at it the other way around and say: ‘Do I need to spend some money to buy call options to protect myself from a rally on the other side’.”
“Given where some of the skew is in options markets, the volatility on puts relative to volatility on calls is quite high. Instead of buying puts, you can sell some puts, then you can use that money to buy leveraged upside.”
Fitzgerald also favors:
*Long dollar vs basket of Asian currencies
*Long euro stocks versus Swiss equities
*Long basket of global industrials shares
*Staying cautious on emerging markets
*Says Trump re-election a net positive for markets
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Additional reporting by Yoruk Bahceli; Editing by David Clarke